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Corporate due diligence increasing biodiversity liability risk for corporates

  • Market Insight 04 March 2022 04 March 2022
  • UK & Europe

  • Climate Change

Multiple indicators in early 2022 point to an increase in biodiversity risk.

In the 21st century, the global rate of species extinction is tens to hundreds of times higher than the natural rate over the past 10 million years.  In January 2022, the World Economic Forum in the 17th edition of its Global Risks Report ranked biodiversity loss as one of the three most potentially severe risks for the next decade along with climate action failure and extreme weather. In February 2022, the UN Intergovernmental Panel on Climate Change (IPCC) published the second of four reports in its sixth assessment cycle, called Climate Change 2022: Impacts, Adaptation and Vulnerability, which projects that 9 - 14% of terrestrial and freshwater species will be at very high risk of extinction even under the most ambitious climate target of 1.5C degrees warming.

Corporate Sustainability Due Diligence

Against this background, the EU published its proposed Corporate Sustainability Due Diligence Directive (the Directive) on 23 February 2022. This mandatory human rights and environmental due diligence (mHREDD) framework marks a significant step in the direction of supply chain due diligence on both adverse human rights and environmental impacts. An adverse environmental impact as defined in the Directive specifically includes a violation of the obligation under Article 10 (b) of the Convention on Biological Diversity to take necessary measures to avoid or minimise adverse impacts on biological diversity.

At the same time, biodiversity harm may also constitute a breach of human rights where there is harmful soil change, water or air pollution, harmful emissions, excessive water consumption or other impacts on natural resources, that impair food production, deny access to safe water, harm health or economic rights, or affect ecological integrity. All this points to more scrutiny of corporate impact on biodiversity and an increased accountability for biodiversity harm caused.

Mandatory due diligence obligations

The draft Directive lays down mandatory due diligence obligations in respect of a company’s own operations, their subsidiaries and their value chains (direct and indirect) where there is an “established business relationship” which means a “business relationship, whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain.”

Under Article 7, a company shall be required to undertake specific steps to prevent potential adverse impacts in its own operations and value chain:

  • in consultation with stakeholders, develop and implement a prevention action plan, with timelines for action and indicators for measuring improvement; and
  • seek contractual assurances from direct business partners to comply with the company’s code of conduct and prevention action plan, including by seeking assurances from partners (contractual cascading), with measures to verify compliance.

Article 8 requires companies to neutralise or minimise any actual adverse impacts by paying financial compensation to victims of human rights or environmental harms and developing a corrective action plan with timelines for action and indicators to measure improvement, among other things.

Importantly, Article 22 of the Directive provides that EU Member states shall create a civil liability regime for failure to comply with the due diligence process under Articles 7 and 8 where an adverse impact that should have been identified, prevented, mitigated or brought to an end occurred and led to damage.

All of this means that companies in scope will be responsible, inter alia, for putting in place measures to prevent biodiversity loss occurring as a result of activities in their value chains, and where they fail to do so, could face litigation in European courts.

Who will be impacted?

Once adopted, the Directive will apply initially to all EU companies with more than 500 employees and EUR 150m annual turnover and, two years later, to EU companies with 250 employees and EUR 40m annual turnover in “high impact” sectors such as textiles, agriculture, and extraction, manufacturing and wholesale of mineral resources.  It would also apply extraterritorially, to non-EU or “third country” companies with EU turnover of EUR 150m or EUR 40m for high-impact sectors. The Directive is expected to cover 13,000 EU companies and 4,000 non-EU companies.

Under this legal framework, a corporate risk of incurring liability for biodiversity damage or loss linked to company’s direct or indirect activities may substantially increase. Companies should evaluate their options prudently and start coming to grips with the biodiversity risk landscape and how to responsibly mitigate their exposure to biodiversity liability.

Biodiversity liability and value chain risk, including the role of the EU Corporate Sustainability Due Diligence Directive, is the subject of an upcoming joint paper by global law firm Clyde & Co LLP and the Global Resilience Partnership (to be published in Spring 2022). You can register your interest to receive a copy below.

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